Alcohol Reform and “Structural” Economic Problems

During the past 4 years you’ve no doubt heard Republican politicians, and even many Democrats, say that the economy’s not growing as fast as it could because we have “structural” problems. That is, the problem isn’t weak sales, it’s that the supply side of the economy is getting choked out by job-killing regulations that aren’t allowing us to produce as much as we could be.

I think the problem is mostly about weak demand, but at the state level there is some truth to this story. Republicans rarely want to get more specific about it, so allow me to put some meat on the bones with an actual example of a job-killing regulation that is stunting the Pennsylvania restaurant industry: the liquor license cap.

Republicans won’t like this story though, because the villain isn’t the unions or the poors – it’s other business owners.

Basically, all PA restaurants could be more profitable if they were allowed to serve alcohol. In other states, restaurants use the high mark-up on booze to cross-subsidize the food. In PA, only restaurants who can afford to purchase one of a limited number of liquor licenses get to do that.

With the stroke of a couple hundred pens, the PA legislature and Tom Corbett could change all this and give every restaurant the ability to sell alcohol, increasing everyone’s profits overnight and increasing restaurant workers’ wages.

It’s the easiest known way to increase growth and jobs in the service sector. So why aren’t we printing up thousands of new liquor licenses?

Tom Peters would be quite vocal in support of the tavern owners’ interests (understandably so) through the night. What are the tavern owners’ interests? They have an asset — their license — that is quite valuable, worth tens of thousands (or even hundreds of thousands) of dollars, and they don’t want to see anything happen that will decrease the value of that license. Beer distributors selling sixpacks will cut into their sixpack business. Well…maybe. But the grocery stores that bought bar licenses to sell sixpacks are cutting into it now, and the fact is that for most licensees, sixpack sales are a tiny part of their income. Even those who have used their license to run sixpack stores would probably be able to compete, though with lower markup and more effort. But if they’re going to give that right up, they want something in return, and that…is where politics and the art of the possible will come into play.

And that is why we have no sixpack law, because the tavern owners haven’t been happy with any deal they’ve been offered. I get that it’s their family business, their livelihood, but…we vote too. Maybe, with an activist leader coming to the committee, it’s time to cut that deal.

We’re not doing it because for some reason politicians are running the state for the benefit of the license cartel, rather than changing the law to unlock more small business growth and raise restaurant worker wages.

If tavern owners don’t want to accept any of the compromise plans to buy them out, then eventually you just need to liquidate them, not shut the reform effort down. It would be worthwhile to buy them out of their licenses to get a more dynamic restaurant market, but if they don’t want a deal then at some point you stop trying to buy them out and start printing up more licenses.

The problem with all the various alcohol reform ideas is that they’re starting from the premise that none of the reforms should create more competition for any of the incumbent players. That’s why we’re getting nutty Rube Goldberg ideas like this one:

Speaking of cutting deals, we did get into privatization. The senator is backing a plan to sell wine and spirits by the bottle for takeout at bars. The licensee would pay a $10,000 annual fee for that right (this would obviously lead to the equivalent of specialty bottleshops like The Foodery, but for wine or spirits, or both). Tom was skeptical; many places don’t have the room for the inventory that would require. Well, then don’t get the license, or figure something else out: if there’s money to be made, people will figure out a way to make it.

$10,000 annual fee! Takeout bottle service at bars! Apparently the only reform ideas that can get any oxygen are things that nobody would want to do, meanwhile the stuff everybody actually wants – booze in grocery stores, expanded six-pack sales, more booze-selling restaurants – are ruled out of hand before the debate even starts.

I’m not sure I agree with on your definition of “structural,” but I agree with how we got here. I think there are a few lessons to be learned.

1. this case proves the importance of “path dependence” in policy making. While I doubt anyone would design the system we have purposely, it is the system we live with and the money and time invested by some restaurant owners in their licenses is a factor that must be dealt with. They paid a premium for a scarce good and just printing more undermines the arrangement with little regard for those wh0 “played by the rules” at the time.

I think your analysis, by focusing on the “license cartel,” ignores the immediate governmental revenue loss that ending this system would cause. Yes, the possibility exists that there may be higher revenues later, but this is hard to anticipate. Nor does it take into account the opportunities for politicians to “help” with this scarce system for political gain.

2. Democracies don’t really allow the dynamiting of the system as you lay it out. Somehow, either through tax abatements or direct payment the playing field has to be re-leveled.

3. Government(and society) doesn’t have any interest in having a good restaurant scene, any more than it has an interest in having swell hockey games. It does have an interest in building stable tax revenues for desired public services and in providing the basis for commerce to support those revenues.

Probably to that end, an overall tax system that taxes consumption at a consistently low with few exceptions, with business district zoning rules that don’t need consistent review is probably the way to go. If the State gets rid of this system with an equally complex system only for restaurant owners, eventually people will game the gaps in the system.

The Founders anticipated the role of “interest” in society–its hard to take much sympathy with the “shocked, shocked” look at State government when a lot of these rules were put in place due in part to Progressive support of Prohibition!

I’m using “structural” the same way Republican politicians use it – as a catch-all for supply side constraints. That could either mean we’re running up against real resource constraints, or we’re running up against organizational constraints.

It’s hard to know how the revenue would shake out. If you gave any new or existing restaurant the right to buy a liquor license for say, a $2000 fee, you could end up raising even more money. You get the money from the fee, you get higher sales and wage tax collections from restaurants when profits and wages increase, local governments get more prop tax and biz privilege tax revenue as more restaurants open, etc. I would love to see the Independent Fiscal Office score this. Anyway, if politicians are worried about the revenue, they can take their pick from about $4 billion in weaker claims on the budget to make it up.

I don’t think it’s shocking that politicians bow to the considerable pressure to design markets to favor incumbent producer interess. But I’m not willing to take the cynical view that this means change is impossible.

I just saw Lincoln over the weekend so I’m especially jazzed about this point. Politicians have agency. Merely pointing at politically-strong incumbent producers is not a sufficient excuse for inaction on socially beneficial reforms. Change starts with the expectation that politicians will act in the broad public interest. The lesson from Lincoln’s negotiations with the slave owners is that if incumbent producers keep rejecting your offers to buy them off, the right thing to do is to wipe them out anyway.

I don’t think its impossible at all. I would say the liquor license issue is a lot easier to solve than the State Store issue, where apparently Good Union Labor is at risk.

There’s a mix of interests that a solid policy appeal would win over. I highly doubt that restaurants (particularly in cities) get much business simply because they have a liquor license. Restaurants, as you point out, do get a lot of business when they are part of a vibrant, interesting, culture with other interesting businesses around them. So appealing to a collective business culture–as was done in Denver, among other places–can help.

Going to a per-serving alcohol consumption or sales tax would shift costs from the seller to the consumer in a meaningful way, and everyone could pretend the tax is for “liquor control” as the license is. It makes little sense for a restaurant owner to shell out a one time or annual fee for the “privilege” of someone else drinking a glass of wine. A much cheaper (I’d say $1,500-2,500) license would be fine too.

Revenues is a tough issue because it (like the health care law) has a complicated mixture of short term charges and long term income streams that would be difficult (but not impossible) to solve. But buying out the license (face value only) removes much of the reason for opposition.

I really think the problem here isn’t in the restaurant owners (assuming they don’t lose their investment in a license). It is politicians and the Liquor Control Board, who gain power by the ability to distribute scarce goods. They are the ones who control the conversation in Harrisburg.

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